Reservation of Rights Letters
By Alan Rogers and Spence Taylor
Reprinted with permission from Risk Management magazine, copyright 2000 RMSP, Inc. All rights reserved
A reservation of rights defense is a means by which a liability insurance carrier agrees to protect and defend its insured against a claim or suit while reserving the right to further evaluate and perhaps even deny coverage for some or all of the claim. It is most commonly used when the claim or suit contains both covered and non-covered allegations, when the allegations are in excess of policy limits, or when the insurer is still investigating its defense and coverage obligations. For the insurer, a reservation of rights provides the flexibility to satisfy its duty to defend without committing to coverage. For the business owner who ultimately may have to pay for an adverse judgment, it requires careful monitoring and attention.
Usually under a reservation of rights, the insurer retains defense counsel for the insured while monitoring the case and coverage claim either itself or through counsel. Although the defense counsel owes complete allegiance to the insured, the insurance company may separately challenge coverage, even while continuing to retain defense counsel for the insured. In this sometimes-confusing scenario, the insured should take certain basic steps to protect its interests:
1. Pursue all possible coverage – Different insurance policies from different carriers may provide coverages that fill gaps left by other policies. Give notice of the claim to all of your potential carriers. Failure to do so can kill coverage. The mere fact that one carrier agrees to defend under a reservation of rights does not mean that other carriers should not be notified. If other carriers remain silent or are slow in responding, continue to request their involvement and do it in writing.
2. Make sure your answer is timely filed – Immediately coordinate with the insurer to make certain an answer to a complaint is filed quickly, otherwise a default judgment could be entered against you. If the insurer is slow in responding to your notice of lawsuit, retain counsel to file an answer on your behalf, and notify your insurer that you will seek reimbursement for these costs.
3. Understand why the insurer is disputing coverage – Understanding your insurer’s coverage position will help you monitor events in the lawsuit that affect coverage. Carefully review your reservation of rights letter (possibly with the aid of independent counsel) until you fully understand your insurer’s coverage position. Your insurer has a duty to identify every possible basis for denying coverage, and as a result, the reservation of rights letter may be difficult to comprehend. Notify your insurer in writing of any points you do not understand. A prudent insurance carrier will completely explain its coverage position.
4. Consider retaining independent counsel – Separate counsel can monitor the lawsuit and coverage and help you fully understand the coverage issues. An outside eye may prove important in making sure that developments in the lawsuit do not adversely affect coverage. If a coverage dispute later develops, your counsel will be an important part of your effort to deal with the insurer’s coverage position.
5. Monitor all case developments, including settlement – Make certain that your defense counsel updates you on a regular basis and immediately in the event of a significant development. Request copies of all correspondence and pleadings filed by any party. If settlement becomes possible, consider making a written request to the insurer to settle the case within policy limits. This keeps you from getting stuck with the unpleasant prospect of an uninsured verdict down the road. If mediation or a settlement conference is scheduled, attend or have independent counsel attend. Personally monitoring these developments will safeguard your interests.
Keep the Lines Open
The reservation of rights defense requires heightened attention on the part of the insured. Given the specter of a future coverage denial, the insured should also closely monitor and participate in the defense until the conclusion of the lawsuit. With this in mind, instant communication between parties is vital to ensure that a reservation of rights defense is adequately presented.